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CONSOLID FORMATION


Cuckoo for Cocoa?

10/11/00 03:48:32 PM
by David Penn

A rally in December cocoa brought prices to the top side of a two-month trading range. But can the bulls bring cocoa out of the basement?

Security:   N/A
Position:   N/A

Cocoa prices have been falling for much of the year, from a year-to-date peak of $1,040 per metric ton in mid-March to a low of less than $775 per metric ton in late August, a 25% drop. Presently, looking at the December contract, cocoa has oscillated between $825 and $775 in a trading range that has lasted since the beginning of August. While the current upswing in prices has brought cocoa to the top of its late summer trading range, prices have failed to close above the $850 mark. This area is proving to be quite a barrier to further advances insofar as earlier rallies in September also failed to sustain closes above $850.

But there may be reason for optimism on the part of cocoa bulls. Although cocoa was in a downtrend leading into the trading range in August, the range has afforded the opportunity for price action to moderate somewhat, as both the 9- and 18-day moving averages have leveled off going into August. However, heading into October, the 9-day moving average moved upside of the longer 18-day moving average on a series of bullish trading days that saw closes near the very top of the range (see chart).

Note the 9-day moving average moving above the longer 18-day moving average. While still a part of the trading range, the move suggests the possibility of bullish price action in the near term.
Graphic provided by: Barcharts.com.
 
Although the $850 mark has been approached but not breached, the recent behavior of the moving averages should be encouraging for cocoa bulls. The fact that the upside move of the shorter moving average over the longer moving average comes not simply on the tail end of a downtrend, but after more than eight weeks of consolidation in a $50 price range, suggests that cocoa's next significant price move will be more sustainable. At a minimum, a close above the $850 mark would be the first stop in a solidly bullish direction, besting the highs of September and surpassing the old support level. Prices closing in this area could help restore cocoa's previous trading territory, a $50 range from $875 to $925. In the short term, look for the 9-day moving average to continue climbing against the 18-day moving average for evidence of a potentially range-breaking rally.

To be sure, cocoa has languished in some of its lowest price territory in recent history. Prices below $800 per metric ton were reached earlier this year, though after rallying to over $1,000 per metric ton in mid-March, cocoa remained above $850 until the late July decline that brought cocoa into its current range. Those looking for clues toward longer-term movements in cocoa should keep this in mind, as well.

There is, however, another way to trade December cocoa--in particular, if the $850 mark continues to be insurmountable in the near term. This strategy would involve taking short positions when cocoa approached $850, and long positions when cocoa neared the opposite end of the range at about $775. With the appropriate stops and/or vigilance, such a strategy could prove to be quite sound should cocoa prove itself unable to climb out of its present consolidation.



David Penn

Technical Writer for Technical Analysis of STOCKS & COMMODITIES magazine, Working-Money.com, and Traders.com Advantage.

Title: Technical Writer
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